How Digital Transformation Is Shaping Indonesian Banking Finance And Insurance Sector

Insurance (BFSI) sector in Indonesia, the largest economy in Southeast Asia and one of the biggest emerging markets for the financial services industry. It focuses on the following broad points:

- The current state of the BFSI sector in Indonesia

- Digital transformation in the BFSI sector

- Indonesia’s Digital banking sector sees rapid growth

- Opportunities and challenges

- Conclusion

The rise of internet banking, mobile banking, and digital payments in the last decade has led to a rapid change in the way customers interact with financial institutions. And this trend has accelerated in the last 2 years during the Covid-19 pandemic, with a spike in the adoption of digital finance. Users of banking and finance apps have seen 37% YoY growth in Jan-21, with a user base of 79M compared to 58 M in Jan-20. Similarly, the peer-to-peer lending market grew from 22 billion IDR worth of loans per month before Covid to 9.5 trillion IDR worth of loans per month by end of 2020, even after suffering a temporary setback during the initial lockdown months.

The current state of the BFSI sector in Indonesia

Indonesia (population 270 million) has one of the world's largest unbanked and under-banked populations, with only 50% of adults having a bank account. One key reason for this is the geographical spread of this archipelago nation (with 17K+ islands) has hindered the development of the physical infrastructure required for banking services, especially in remote islands.

The financial services industry in Indonesia is dominated by the four largest banks - Bank Mandiri, Bank Rakyat Indonesia (BRI), Bank Negara Indonesia (BNI), and Bank Central Asia (BCA). They together control 55% of the lending market and 63% of the combined market share for current accounts and savings accounts (CASA). Other commercial banks, rural banks, microfinance institutions, and multi-finance companies make up the remainder. In addition, credit lending in Indonesia is heavily skewed towards corporate and consumer loans, with MSMEs accounting for 18% of the total portfolio of loans. Also, only about 3% of the population has an active insurance policy, excluding mandatory health insurance, due to complicated registration, ineffective claim processing, and high premiums.  

Digital transformation in the BFSI sector

Indonesia has 345 million mobile connections and 202 million internet users, with an internet penetration of around 70%. The chart below shows that the number of internet users has been increasing steadily and is expected to reach 85% of the -population by 2025.

Figure: Number of internet users in Indonesia 2016-2026 (projected)source:

This familiarity with smartphone technology and increased usage of e-commerce, digital media, and other digital services like ride-hailing are the demand-side pull factors fuelling the rise of digitalization in Indonesian financial firms. Here, we will explore how digital technologies are transforming Indonesia's banking, financial services, and insurance sectors.

Digital transformation is about transforming business models, existing processes, and customer interactions to create more value by integrating digital technologies like

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